Mumbai: Media baron Kalanithi Maran of Sun TV Network Ltd is close to signing an agreement to purchase a nearly 40% stake in India’s second largest low-fare carrier SpiceJet Ltd from its promoter Bhupendra (Bhulo) Kansagra and distressed-assets buyout specialist Wilbur L. Ross for around Rs800 crore, two investment bankers familiar with the development said.

This values the company at Rs2,000 crore against a market value of Rs1,400 crore going by Thursday’s closing price of SpiceJet shares.

Graphic: Ahmed Raza Khan / Mint

Maran, who runs 20 television channels and two general newspapers in south India, will also make an open offer to SpiceJet’s minority shareholders to acquire an additional 20% stake. Under Indian takeover rules, any acquisition of 15% or more triggers an open offer and the acquirer needs to make an offer for at least another 20% of the target company. Edelweiss Capital Ltd is exclusive adviser to the deal.

The shares of SpiceJet fell 0.52% on the Bombay Stock Exchange on Thursday to close at Rs57.85 apiece even as the exchange’s bellwether Sensex index rose 1.59%.

Maran, elder brother of Union textiles minister Dayanidhi Maran, has been keen to enter the aviation industry and had even obtained a no-objection certificate from the ministry of civil aviation to run a non-scheduled air passenger service. Sun Network’s board had given a go-ahead for its future plans to enter civil aviation and import aeroplanes.

In December 2009, Maran held discussions with Star Aviation Pvt. Ltd, which owned a licence to start a regional airline in south India.

“As a first step, Ross will convert his foreign currency convertible bonds (FCCBs) into equity shares and will own 27.11% stake in the low-cost airline. At the second stage, both Ross and Kansagra will sell their 40% stake to Maran," one of the bankers said. Ross had bought convertible bonds of SpiceJet in July 2008, which will be converted into equity at Rs25 a share, a price that ensures that his exit in favour of Maran will be a profitable one.

Kansagra owns 12.89% in the company through Royal Holding Services Ltd.

Among the other major shareholders, the Tata group owns 6% stake.

Despite repeated efforts, Mint could not reach out to Sun TV Network executives, Kansagra and India representatives of WL Ross for comments on this story.

“As a policy, we do not comment on market rumours and speculations," said a SpiceJet spokeswoman, answering Mint’s query.

“Maran had held a series of discussions with SpiceJet promoters for months," the second banker said.

Foreign direct investment (FDI) limit in Indian airlines is 49%. Currently, foreign ownership in SpiceJet is 27.5% and if Ross was to convert his FCCBs to equity, then the FDI limit will be breached.

“We have structured the deal in a way to take care the FDI limit is not violated," said the first banker.

The airline’s other foreign shareholders—Istithmar PJSC, the investment arm of Dubai World, and Goldman Sachs—can take part in the open offer, the banker said, adding that Maran is ready to shell out around Rs1,200 crore to own up to 60% stake.

Both Istithmar and Goldman Sachs own FCCBs that can be converted into equities.

In early February, Istithmar, an anchor investor in SpiceJet, sold a bulk of its 13.39% stake to a clutch of domestic funds, including DWS Invest BRIC Plus Fund, Reliance Mutual Fund and Birla Mutual Fund.

“A deal is in the works and could be concluded in a few days," said the same banker who had worked with SpiceJet to raise $80 million (Rs376 crore today) from Ross through his eponymous private equity fund in July 2008, and persuaded investment bank Goldman Sachs to invest $20 million.

Industry peers believe the change in ownership will help SpiceJet expand operations.

“Till now, SpiceJet’s fragmented ownership has prevented the airline from expanding its fleet as there was always a sense of uncertainty in the ownership, with various promoters looking to exit and a new set of promoters wanting to come in," said a senior executive with a leading rival private airline, who did not want to be named. “The delay for the next round of fleet acquisition comes at a time when its arch-rival IndiGo has obtained the government approval to buy 150 more planes in addition to 100 what they had ordered," he added.

SpiceJet has plans to add four planes this fiscal year.

In April, SpiceJet had a market share of 12.6% among domestic carriers. IndiGo is the largest low-fare carrier with a market share of 15.7% in April.

Gurgaon-based SpiceJet had posted a Rs61.4 crore net profit in fiscal 2010. It had held roadshows to raise $75 million in April by selling new shares to domestic fund houses ahead of launching international flights. Its board has even cleared a proposal to tap the international market to raise capital.

“For SpiceJet, what is good is a well entrenched group of investors or a promoter who can further the strategic interests of the company. W.L. Ross is a turnaround specialist and, therefore, cannot be construed as a promoter. They are financial investors and will seek their exit when the turnaround is complete," said Mahantesh Sabarad, senior vice-president (equity research) at domestic brokerage Fortune Equity Brokers (India) Ltd, who has been tracking the stock.

Referring to Maran’s business entity’s interest in SpiceJet, he said, “This appears to me only a financial interest and not a strategic interest in SpiceJet. This still means SpiceJet will not find a new promoter just as yet."

“Any investor would be sinking his money in Indian low-fare carriers as they need to change their business models," said Nawal Taneja, professor and chairman at department of aviation, Ohio State University.

“Copying a Western model need not be necessarily good for an Indian airline," added Taneja, who has 40 years of experience in working and advising for international airlines, and is the author of six books on the global airlines industry.